What really changed the Labour party was not Tony Blair's election as leader in 1994 or his later success in ditching clause 4, or even the first astonishing landslide in 1997. It was the 2001 election. Then, for the first time, the majority of Labour's vote came from what political scientists call the middle classes. Even more important was another first: campaign donations from business exceeded donations from the trade unions.

This was the fulfilment of Blair's ambition. He wanted to free Labour from its historic obligations to the unions, which in his view were unpopular, backward-looking and selfish. The arrest of Lord Levy, in connection with the police inquiry into cash-for-honours, and the allegations of sleaze that now surround Downing Street are only the most headline-grabbing results of that Blair project.

Big capital now controls the British state more effectively than the big union battalions ever did, even under a Labour government. It is deeply unfashionable to suggest there was anything to be said for the old system, where the unions financed one big party and business the other. But why is it an improvement for business to support all the major parliamentary parties? The Scottish Nationalists alone thought the selling of honours might be a matter for the police. Why is it more acceptable for a Bernie Ecclestone or a Lakshmi Mittal or a Gulam Noon to wield influence than it was for one of the union barons of old, such as Jack Jones and Hugh Scanlon? The union influence, unlike the influence of capital, was transparent and accountable. The unions' donations and loans were never secret - they could not be, because they had to tell their members how they were spending their money - and nor were their meetings with ministers.

The selling of honours may be a criminal offence but, in the larger scheme of things, it is a fairly minor matter. True, business people value a title because it always looks good on the company notepaper, particularly overseas. Peerages enhance the brand, the most precious asset of any modern business. But employers didn't throw in their lot with New Labour just so they could all wear ermine; they could have got that from the Tories. They saw two significant advantages in supporting the Blair project.

The first was that they headed off any prospect of a government that might come to power on a programme of high company taxation and regulation, and repeal of anti-union legislation. A business-friendly Labour government is preferable to a business-friendly Tory government - even if a Labour one isn't quite as friendly - because it removes any threat of power falling to a hostile party. For all new Labour's travails, that holds as true now as it did in 1997. It's unlikely that Gordon Brown will be as red as some Labour MPs hope; a more realistic prospect is that Labour, back in opposition, returns to anti-business, pro-union type. Safer, then, to keep New Labour in power and close off options to the left.

The second reason for supporting New Labour is its commitment to expansion and modernisation of public services. This sounds paradoxical; business usually favours a small state. The Tories, if they had spent long enough in power, might have moved towards outright privatisation of, for example, education and health services. Schools and hospitals would have been run as independent commercial enterprises, with the state's role confined to handing out vouchers that allow parents and patients to "buy" services.

That sounds good for business; it could make profits from public services, which tend to occupy areas where growth is most likely over the coming decades. In reality Labour, mainly through private finance initiative (PFI) projects, has developed far more attractive channels for private capital to invest in the public sector. In return for building hospitals or schools, companies are offered, in effect, a guaranteed income stream for running services over 20 or 30 years.

So lucrative and risk-free are these deals that many companies that entered early PFI contracts could refinance their borrowings at much lower rates of interest, thus boosting profits to stratospheric levels. In some cases, according to the Association of Chartered Certified Accountants, shareholders enjoyed returns of more than 100%. They could not have dreamed of such rewards if they had set up and run schools in a genuinely open and competitive market, with all its risks of failure.

Moreover - as shown in David Craig's Plundering the Public Sector, published in the spring - New Labour has virtually handed over management of the public sector to private consultants. The NHS, the Benefits Agency, magistrates courts and other arms of the state have been "modernised" under the supervision of consultants, with dubious results and at an estimated cost of £70bn. No wonder that, just before the 2005 general election, a top consultant, writing in his trade magazine, advised colleagues to follow their wallets and vote Labour.

Given how New Labour has turned the public sector into a cash cow for private companies, there was never much need to sell peerages. The Blair governments have offered rich rewards to big business, rewards that are far greater than their Labour predecessors offered to the unions. The idea, propagated by sections of the press, that union paymasters dictated to Labour governments is a myth. True, trade unions had a big voice in legislation, particularly in employment legislation; but again, why is it all right for, say, Rupert Murdoch - who is not even a British citizen - to dictate government policy, but not acceptable for the representatives of millions of employees to be heard?

The unions, in any case, delivered to the last pre-Blair Labour government an extraordinary period of pay restraint which, in a period of high inflation, saw the average worker's purchasing power fall by 7% in two years. The then permanent secretary at the Department of Employment called it "the most severe cut in real wages in 20 years". Pay restraint collapsed - and with it James Callaghan's government - only because Labour tried to push it a stage too far.

No pay restraint has ever been delivered by, or demanded of, big business. Year by year, company executives award themselves substantial pay bonuses of 10%, 20%, 30% or more, while their employees struggle by on 2% or 3% rises. There is nothing anybody can do about it, because unions are so weakened by the Tory legislation of the 1980s, which Labour has largely failed to reverse, and nobody now would dream of an incomes policy.

It is hardly surprising, therefore, that Brown has failed to reverse significantly the rising inequalities of income and wealth. Pre-tax differentials are widening faster than the chancellor can adapt the tax and benefit system to compensate. The balance between bosses and workers has been tilted decisively in favour of the former. And the balance will not be corrected as long as business has the two main parties (and increasingly the third as well) firmly under its thumb.